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ERP Software Spending Seems to Be Picking Up by Timothy Prickett Morgan No one wants to call a recovery in the IT business, because no one wants to look like a fool if such a prediction turns out to be wrong. But the consultancies that track spending on enterprise applications (which have been called enterprise resource planning, or ERP, applications since the mid-1990s) are starting to indicate that IT spending for these complex and expensive applications is on the rise again. 
There is no such thing as a consensus of leading or lagging indictors for IT spending. The market consultancies and Wall Street analysts who follow IT do lots of surveys, and are told lots of things. Whether chief information officers do exactly what they say they will do as part of these surveys is not something that can be easily analyzed or quantified, except in the broadest or crudest sense as each IT vendor reports its financial results each quarter. Over the past several months, the rate of shipments in the server business has increased and revenues have stopped plummeting each quarter. (See the separate story in this issue for the latest server shipment data from Gartner.) An uptick in server shipments is perhaps the best indicator that customers are deploying new applications and adding users. This seems to be happening, and at a healthy pace. It is hard to say whether spending on ERP software is a leading or a lagging indicator. Companies spent tens of billions of dollars per year on ERP software in the late 1990s, so they could modernize in order to face the Y2K crisis and the e-business and dot-com explosions. ERP software acquisitions drove tens of billions of dollars more in IT hardware, software, and services spending. The dot-com boom in particular caused many companies to buy an exorbitant amount of excess capacity, which has taken years to be consumed by applications. This excess capacity was not just the normal extra processors, memory, or disk capacity required to deal with a peak uptick in processing that was on the order of 20 to 30 percent, as is typical in OLTP applications or with batch jobs. No, the dot-com excess had to be 100 to 200 percent above normal capacity because Internet users were inherently random and unknown, so workload spikes coming in at random from the Internet could utterly cripple machines. Here we are in 2003, and the enterprise software market (which includes ERP, customer relationship management, supply chain management, portal, and other applications) has endured a couple of rough years. By some indications, there is a slow, if somewhat jerky, recovery underway in ERP software spending. Before I get into it, I just want to inject an idea into this analysis that I haven't seen yet. Any rebound in total revenues among ERP vendors might be caused by maintenance price hikes and the use of services (rather than in-house talent) to more quickly implement ERP projects, to get a faster return on investment. Everybody is crazy about ROI these days, and this is the single biggest factor driving IT projects today. If a project doesn't cut costs or generate more money, it doesn't get done. The ERP vendors are extremely secretive about their prices, so it is hard to know if they have jacked up prices on maintenance and services to compensate for plummeting license fees in recent years. But I have a strong suspicion that this is what has happened, and that it continues to happen. None of the big consultancies will talk about this, of course. It would tick off their biggest customers, which happen to be the ERP vendors and the server, storage, and database makers, which benefit most when an ERP system is sold. According to a recent analysis performed by AMR Research, which tracks the enterprise software market, ERP sales are in the middle of a slow recovery, and spending on such software is expected to rise in 2004. The companies that AMR is talking to say that they intend to resume spending on ERP software, but AMR's analysis of the major players suggests that they are still struggling to find new customers and that sales cycles are lengthening. There is hope, though, and it comes predominantly from ERP vendors' installed bases. AMR's recent ERP spending survey indicates that the number of companies that intend to buy a new ERP suite or upgrade their current one is on the rise. Big deal, you say. Well, yes. This is the first time in three years that these indicators have been positive. However, ERP software makers' top and bottom lines have not yet felt much of a rebound. SAP, Oracle, and PeopleSoft (which now includes J.D. Edwards) are all selling new software modules such as portals, SCM, and CRM into their existing customer accounts. Add to this new government compliance rules for HIPAA and Sarbanes-Oxley, just to name two irritating regulations that require companies to rejigger their ERP systems, and it comes as no surprise that IT shops are planning to spend more on ERP software. How much, you ask? Well, the truth is that we really won't know until 2004 is done and we are well into 2005. But that is why people do studies and surveys. In another recent IT spending study by AMR, the company's researchers found out that overall IT spending for 2003 was about 3 percent of total revenues for the companies it surveyed. The good news is that 80 percent of IT shops surveyed by AMR say they will keep IT spending flat or will actually grow it in 2004, and overall growth for IT spending among all customers surveyed was about 2 percent. AMR says that ERP software was the largest piece of the IT pie associated with applications, with 26.6 percent of the total IT budget in 2003. The good news, for ERP vendors at least, is that ERP spending will increase its share of the IT pie dedicated to enterprise software to 27.2 percent, based on the survey's results. That may be only six-tenths of a percent, but it sure beats double-digit declines, which is what most ERP vendors have been facing since June 2000. Companies surveyed told AMR that they expected SCM software to grow from 13.6 percent of the IT budget in 2003 to 16.3 percent of the budget in 2004. Spending on CRM applications--such as sales for automation--is expected to be the same, at 16 percent of both the 2003 and 2004 budgets, but will obviously increase if overall IT spending rises next year, by this analysis. AMR's analysts actually think that spending will increase in the fourth quarter of 2003 (which was halfway over at press time), because IT shops are more confident about their businesses and are therefore more confident that they can spend down their 2003 budgets and better plan for increases in 2004 budgets. Over at Forrester Research, a recent survey of 354 North American companies that have ERP suites indicate a somewhat mixed picture of a recovery in the ERP market. According to the survey, which was detailed in report called "What Matters to Enterprise Apps Buyers," only 12 percent of companies running Oracle applications said that they were going to increase their budgets for these applications in the next 12 months. PeopleSoft seems to be doing a little better, with 19 percent of respondents saying they would increase spending. SAP must be ecstatic upon hearing that 34 percent of those customers surveyed by Forrester are planning to spend more dough on software from SAP in the next year. According to Forrester, a big portion of the uptick among these vendors is being driven by midrange customers, which the company defines as having between $500 million and $1 billion in annual sales. This brings me to my next point. SAP, PeopleSoft, and Oracle define the midrange market in terms that suit their needs. My definition of midrange is between $50 million and $500 million and well under 1,000 employees (perhaps anywhere from 100 to 750 employees). Companies of this size behave differently and buy differently from the companies that can digest whatever software that SAP, Oracle, or PeopleSoft cook up. The statistics I have seen indicate that IT spending among small and midsized businesses is growing at twice the rate of large enterprises. Economic recoveries sometimes start among big enterprises, and sometimes they are more like a reorganization of the economy from the bottom up. The various economies of the world--which means the companies that make up those economies--had so many big structural problems as the last decade was ending that any recovery in the economy had to come from SMB customers. And that's why I think small and midsized businesses will increase ERP spending at a much faster rate than larger enterprises as the ERP recovery kicks in more solidly in 2004. It may not seem like it, but now is a great time to buy ERP software--if you are willing to make a bet on the economy recovering. Plenty of companies will not take that bet, and they will wait until there is a stronger recovery to start upgrading their enterprise software. They will, of course, miss out on the very flexible pricing and terms that come from having eager ERP vendors competing aggressively for their business. When the economy recovers, ERP vendors will chase the biggest deals, like they always have. In this market, at the cusp of what looks like a recovery (however rocky it may be until the spring of 2004), even a midrange account can get the hand-holding and palm-greasing that is normally reserved only for large enterprises.
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